The Truth About Gasoline Prices

What or who is actually to blame for the seemingly random peaks and valleys of the gasoline game?

Gas prices have definitely tamped down President Obama’s political polling in the last few weeks and every time this happens cries go out for someone to do something. The truth is, U.S. gasoline prices rank101th in the descending order of what the average consumer pays at the pump worldwide. With memories shorter than most four-legged animals, the average U.S. consumer believes that either the president or congress can do a lot to control prices at the pump. Nearly two-thirds of the respondents to an ABC-Washington Post poll said they disapprove of how Obama is handling the issue.

Under these misconceptions, perhaps it’s not all that surprising that Obama saw sharp drops in his overall approval rating in some polls recently.

Political rhetoric aside, however, just how much can the president, in a “free market” society really do to affect gas prices?

The Truth Everyone Knows but Won’t Admit

Truth of the matter is, when it comes to oil, and in turn gasoline prices, neither branch of government can do all that much. Wait. I thought the Republicans didn’t want government meddling with private profits. Well, so much for that big lie. But the major causes are myriad and more complicated than a cute turn of phrase that will conveniently fit on a bumper sticker or placard being held at a political rally.

Iran, of course, makes most analysts say that the “uncertainty” is what is driving up the price. The assumption being that specifically, it’s making traders nervous about a possible conflict in a crucial oil-producing region, which could have the effect of cutting off a significant source of the world’s oil. Or, Japan has been using much more oil since shutting down virtually all of its nuclear power plants in the wake of the Fukushima disaster last year. That too adds to the dreaded “uncertainty”. And various conflicts in Sudan, Yemen, Syria and Libya have choked off some production in those countries. OMG! MORE UNCERTAINTY!!!

Convenient, but not the primary reason.

To most of the “uncertainty” causation accusations, I call a 15-yard penalty and loss of down. Uncertainty has almost never driven the prices on the stock, bond, or commodity markets. Uncertainty permeates the markets daily. For gosh sakes, the stock, bond, and commodity markets are the embodiment of legalized gambling…ergo built-in uncertainty! As gamblers go, traders and their constituents are tantamount to either high-risk, high-reward investments or low-risk, low-reward investments. In track parlance, long-shot betters or favorite-betters. Yes, there are mounds of statistical data to be mined, insiders to exploit, researchers to hire. But go to any race track and you’ll see some prospective betters buried in statistics, whether printed or digital, and some merely flipping a coin, or betting on a horse with the same name as a nephew’s pet cat.

In either case, “uncertainty” is not a deterrent for participation. It’s the opposite. With the wherewithal to do so, traders, brokers and gambling addicts alike, feel like they know what they’re doing. They may be wrong, but they are not frightened by “uncertainty”. If these people wanted certainty they’d be putting their money in jumbo certificates of deposit.

Political Rhetoric

As sure as there is not a stray strand of hair on my bald head, Republicans will ALWAYS say opening up the United States to more domestic drilling, frakkiing, or praying will bring gasoline prices down. Newt Gingrich has been hammering on that theme lately in his quest for the Republican presidential nomination, saying he has a plan to reduce gas to $2.50 a gallon. Hogwash. It’s a lie, and if it weren’t you can make a 100% sure bet that it’s illegal.

At the very least, I have to call a foul. American consumers are part of a global market for oil, and crude oil accounts for about three-quarters of the cost of a gallon of gas, according to the Energy Information Administration. So increasing domestic production wouldn’t do much, if anything, to ease prices. Not to mention, it would take years to come to market and start bringing prices down even marginally.

What about the demand side?

Couldn’t the administration bring down the amount Americans spend on gas by encouraging a shift to more fuel-efficient vehicles? What about the Keystone XL pipeline? What about Drill, Baby, Drill?

Maybe, but more and more Americans are leery of government mandating anything, much less that automakers adopt higher fuel economy standards. Additionally, U.S. consumption of gasoline is at an all-time low! Demand in this country is not a concern, and guess what…America doesn’t own any oil companies! That would be COMMUNISM!!! Whether it’s drilled, frakked or appears out of a pig’s ass domestically, America doesn’t own it, nor does she even get a break on its price. And EVEN IF IT DID own it, it would take around a decade, experts say, for the effect of that shift to start to be felt at the pump. That’s at least one possibly as many as three administrations away.

Some Democrats have argued that unscrupulous speculators on Wall Street are driving up prices in search of short-term profits, and that the administration could ease the pain at the pump by cracking down on this activity. Even if that is going on, and it could very well be, most experts say that global oil markets are simply too large for U.S. regulators to be the auditors of record.

Suppose an investor puts a huge contract or contracts in on the New York Mercantile Exchange? Energy analyst Stephen Schork told the Washington Post last week ” a significant amount of [U.S.] trading is in the Brent Market, which isn’t in New York. “It’ll do nothing to relieve volatility.”

As a possible last-ditch effort, President Obama could tap the Strategic Petroleum Reserve, as was done during the first Iraq war in 1991, after Hurricane Katrina damaged refining facilities in 2005, and by President Obama during Libya’s civil war last year. But this has generally been done as a temporary measure in response to “one-off” supply disruptions, not as a policy response to rising prices. It’s like retirement accounts. THEY’RE SUPPOSED TO BE USED ONLY FOR RETIREMENT!

Despite the immediate doom, gloom and Presidential politics, there is something that is at least a reason for optimism. According to Nate Silver, the New York Times’ statistical guru, a majority of citizens/voters understand that there’s not much evidence that oil or gas prices on their own will sway a significant number of voters one way or the other. Those predisposed to vote Republican will do so no matter the cost of gasoline. The same goes for Democrats.

The real fear is that higher prices could put a crimp in the fragile economic recovery, by leaving Americans with less money in their pockets and thereby slowing down consumer spending. If that happened voters would almost certainly blame Obama, regardless of the actual relief that any president or congress is capable of providing, unless voters quit whining and insist that the U.S. spend the necessary resources to get off of this persistent addiction to the black stuff in the ground.

The White House’s Ace Up Their Sleeve

There is one ACE that President Obama must surely know about, but it is a card the White House does not want to play nonchalantly. Having maintained extremely close back-door ties with Saudi Arabia, the White House and Riyadh have been planning for a disruption in oil supplies due to an increasingly tense situation surrounding Iran. Yes, the U.S. may have a plan with their clandestine buddy in the region who not-so-secretly hates Iran as much as Iran hates the U.S.

And although the likelihood of Israel dragging the U.S. into a direct conflict with Iran appears to be the outward reasoning from Washington and the Pentagon, the preservation of the Petrodollar has been discussed in previous reports as what I feel is the actual reason behind the U.S. involvement in potential military action, (see: http://hg.scimth.net/2012/02/07/petrodollar-iran/).

But the ace up the President’s sleeve would center on Riyadh, who has been quietly filling up its network of huge storage holding tanks that they have scattered around the world in case of a disruption in supplies. If this has been taking place, and if it were necessary for Saudi Arabia to tap this network of supply tanks prefilled with crude, then it could ramp up what production capacity it had remaining, while supplementing the supply streams with the prefilled oil tanks.

It has also been rumored that at least one reason for the U.S. consistently calling on restraint from Israel is to allow the Saudis more time to implement this contingency plan. Sidi Kerir, Egypt, Rotterdam, the Netherlands, and Okinawa, Japan are the facilities that Saudi Arabia has openly admitted to having. As is the case with most countries, for every item publicly acknowledged, many more actually exist.

The use of storage would allow Riyadh to respond quicker to a disruption in Iranian flows, whether triggered by US and European sanctions or war. The kingdom has also admitted using this flexibility in crises past.

However, absent a cohesive, conspicuous, energy plan, which is unlikely until at least after November, and much longer if a new administration has to start from scratch, the prospects for a big reduction in price anytime soon seems remote. And it makes Newt Gringrich’s campaign claim that the former Speaker Gingrich can bring down the cost of gasoline to $2.50 seem even more unlikely.